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Illinois Sues Wells Fargo Over Subprime Loans

Claims lender discriminated against African-American and Hispanic borrowers

August 1, 2009

“As a result of its discriminatory and illegal mortgage lending practices, Wells Fargo transformed our cities’ predominantly African-American and Latino neighborhoods into ground zero for subprime lending,” said Madigan. “The dreams of many hardworking families have ended in foreclosure due to Wells Fargo’s illegal and unfair conduct.”

Madigan’s lawsuit, which is the result of an investigation into possible violations of fair lending and consumer fraud laws, cites marked disparities in Wells Fargo’s lending data. In 2005, according to an analysis of Chicago-area data, approximately 45 percent of Wells Fargo’s African-American borrowers and 23 percent of the lender’s Latino borrowers received a high-cost mortgage. That same year, only about 11 percent of the lender’s white borrowers received high-cost mortgages.

The trend continued in 2006, with approximately 58.5 percent of Wells Fargo’s African-American borrowers and 35 percent of its Latino borrowers in the Chicago area receiving high-cost mortgages, compared with only 16 percent of white borrowers. In 2007, approximately 49 percent of Wells Fargo’s African-American borrowers and 25 percent of Latino borrowers were sold a high-cost loan in the Chicago area, compared with only 15 percent of white borrowers.

The lawsuit also follows a recent Chicago Reporter analysis of mortgage data submitted by Wells Fargo to the federal government. That study found that, in 2007, Wells Fargo sold high-cost, subprime loans more often to its highest-earning African-American borrowers in Chicago than to its lowest-earning white borrowers. According to the study, in 2007, about 34 percent of African Americans earning $120,000 or more received high cost mortgages from Wells Fargo in the Chicago metro area, while less than 22 percent of white borrowers earning less than $40,000 received high-cost mortgages from the lender.

“These disparities indicate that something is very wrong with Wells Fargo’s mortgage lending,” said Madigan. “They strongly suggest that the predictor of whether a borrower would receive a high-cost home loan from Wells Fargo was race, not income.”

Madigan’s complaint alleges that Wells Fargo established highly discretionary lending policies and procedures with weak oversight that permitted Wells Fargo’s employees to steer African-Americans and Latinos into subprime loans. As cited in the complaint, Wells Fargo’s discretionary policies and procedures included a compensation structure that rewarded employees for placing borrowers into high-cost mortgages.

The complaint also alleges that Wells Fargo targeted African-American borrowers for the sale of high-cost loans by hosting a series of “wealth building” seminars in cities throughout the country, including Chicago.

Madigan noted that high-cost, subprime loans of the kind sold by Wells Fargo are defaulting and going into foreclosure in record numbers, and are largely responsible for triggering the worst economic recession in recent memory. The Attorney General’s complaint comes as the home foreclosure crisis continues to affect hundreds of thousands of homeowners in Illinois and across the nation. Illinois saw almost 69,000 foreclosure filings in the first half of 2009, up nearly 30 percent from the first half of 2008. In Cook County alone, it is anticipated that mortgage foreclosure filings will top 52,000 by the year’s end, compared with 43,876 in 2008.

“By targeting African-American’s for the sale of its highest-cost and riskiest loans, Wells Fargo drained wealth from families and neighborhoods and added to the stockpile of boarded-up homes that are an open invitation to criminals,” Madigan said.

Additionally, the lawsuit alleges that Wells Fargo Financial Illinois, a subsidiary of Wells Fargo and Company that primarily originated subprime loans, engaged in unfair and deceptive business practices by misleading Illinois borrowers about their mortgage terms, misrepresenting the benefits of refinancing, and repeatedly refinancing loans, also known as loan flipping, without any real benefit to consumers.

Also, the complaint maintains that Wells Fargo Financial used deceptive mailings and marketing tools to confuse borrowers as to which division of Wells Fargo and Company they were doing business with – prime or subprime. As a result, borrowers believed they were doing business with Wells Fargo Home Mortgage, which offered mainly prime loans, when in fact they were dealing with Wells Fargo Financial, a predominantly subprime lender.

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